A Conflict-of-Laws Rule for Companies at Last? – The CJEU in Edil Work 2

On 25 April 2024, the CJEU handed down a landmark decision on EU company law. It curtailed the so-called “seat theory”, which still features in many Member State laws, to the extent that it can no longer be applied to companies from the European Economic Area (EEA).

The Background

The law governing companies has long been a nagging issue of European Private International Law. Around the turn of the millennium, the Court of Justice rendered three sweeping judgments (remember Centros, Überseering and Inspire Art?), effectively creating a duty to recognise companies validly incorporated in the EEA. However, all of these decisions were based on the freedom of establishment and did not directly concern conflicts of laws. For this reason, most Member States recognised companies incorporated in other EEA States but continued to adhere to the real seat theory.

The Facts of the Case

In Edil Work 2, an Italian company was newly incorporated under Luxembourg law and transferred its registered office to the Grand Duchy, while retaining its head office and sole asset, a castle, in Italy. The director of the company appointed a “general agent” under Luxembourg law, who sold the castle, which was then sold on to Edil Work 2. The Luxembourg company then sought the annulment of both transfers before an Italian court, arguing that the delegation of powers to the general agent was invalid under Italian law.

The Issue

Article 25(1) 2 of the Italian Statute o Private International Law (Law No 218 of 1995) requires the application of Italian law to any company with the seat of its administration (the so-called “real seat”) in Italy. The Italian Supreme Court (Corte di Cassazione) asked the CJEU whether it could apply this rule to the operation and management of a company that had been reincorporated and transferred its registered seat to another Member State.

The Decision

The CJEU ruled that the application of Italian law in this situation is incompatible with the freedom of establishment under EU law (Article 49 and 54 TFEU). As the new home state would also apply its rules, the management would have to comply with two sets of rules, those of the first and those of the second state of incorporation. This creates complications and makes exercising the freedom of establishment less attractive.

In the eyes of the Court of Justice, the seat theory constitutes an obstacle to the freedom’s exercise, which could be justified only by overriding reasons of public interest. As such, the Court of Justice recognises the protection of creditors, staff and minority shareholders (see CJEU Polbud, para 54). However, the restrictions imposed in their interest must be appropriate, necessary and proportionate.

The CJEU rules that Article 25(1) 2 of the Italian Statute on Private International Law would go beyond what is necessary if it were to be interpreted as requiring always to apply Italian law as the law of the seat, regardless of any negative effect on the interests of creditors, staff or minority shareholders. The Court of Justice pretends not to know the correct interpretation, but it is quite clear that Article 25(1) 2 requires to apply the law of the administrative seat generally, and not only where the interests of specific groups are negatively affected. This already follows from the provision’s function as a conflict-of-laws rule. These rules determine the law applicable in a general way and allow to disregard them only in exceptional cases, e.g. where overriding mandatory rules apply.

The Upshot

Although the CJEU strenuously denies that it is ruling on Private International Law, it has all but abandoned one of the most important conflict-of-laws rules for companies. The judgment in Edil Work 2 spells the end of the real seat theory insofar as EEA companies are concerned. The application of the law at the real seat remains permissible only where overriding interests are affected. These “overriding interests” under EU primary law are not identical to the “overriding mandatory rules” under EU Private International Law. Still, overriding interests remain the exception rather than the rule and must be demonstrated in each case. Member State will thus need to identify, whether through legislation or court decisions, those rules of their company law that protect important interests of creditors, staff and minority shareholders. Only these can be applied to all companies with their headquarters located within the respective Member State.

— Thanks to Paul Eichmüller, Felix Krysa, Emeric Prévost and Fabian Schinerl for commenting on this post.